Untitled Texas Attorney General Opinion ( 2002 )

OFFICE OF THE ATTORNEY GENERAL . STATE OF TEXAS
JOHN CORNYN
January 14,2002
The Honorable Eddie Lucia, Jr. Opinion No. JC-0450
Chair, Committee on Border Affairs
Texas State Senate Re: Whether section 2001.556 ofthe Occupations
P.O. Box 12068 Code prohibits a revenue-share leasing agreement
Austin, Texas 78711 between a manufacturer of bingo equipment and
a distributor of bingo equipment (RQ-0417-JC)
Dear Senator Lucia:
You ask whether section 2001.556 of the Occupations Code prohibits a revenue-share leasing
agreement between a manufacturer of bingo equipment and a distributor of bingo equipment.’
Section 2001.556 prohibits price fixing by manufacturers, distributors, and suppliers of bingo
equipment and provides that the price of bingo equipment “in the competitive marketplace shall be
established by the manufacturer, distributor, or supplier and may not be established in concert with
another manufacturer, distributor, or supplier.” TEX. Oct. CODEANN. 5 2001.556(b) (Vernon 2002).
If under a revenue-share leasing agreement the manufacturer controls the price the distributor
charges to bingo-game conductors for leased equipment, the agreement violates section 2001.556.
Section 2001.556, a provision of the Bingo Enabling Act, id. ch. 2001, provides:
(a) A manufacturer, distributor, or supplier may not by express or
implied agreement with another manufacturer or distributor fix the
price at which bingo equipment or supplies used or intended to be
used in connection with bingo conducted under this chapter may be
sold.
(b) The price of bingo supplies and equipment in the competitive
marketplace shall be established by the manufacturer, distributor, or
supplier and may not be established in concert with another
manufacturer, distributor, or supplier.
‘Letter from Honorable Eddie Lucia, Jr., Chair, Committee on Border Affairs, Texas State Senate, to Honorable
John Comyn, Texas Attorney General (Aug. 13,200l) (on file with Opinion Committee) [hereinafter Request Letter].
The Honorable Eddie Lucia, Jr. - Page 2 (JC-0450)
Id. fj 2001.556.
This office addressed this provision at length in Attorney General Opinion JC-0269, in which
we were asked whether under section 2001.556 a manufacturer of bingo equipment and a distributor
of bingo equipment could agree as to the price at which the distributor would sell bingo equipment
to a charity. We were also asked whether our answer would change if the bingo equipment were
leased rather than sold.
Relying on the express language of the statute, particularly the wording of subsection (a) of
section 2001.556, and the overarching purpose of the Bingo Enabling Act to regulate relationships
between interests in the bingo industry, we concluded that the statute prohibits a vertical price-fixing
agreement between a manufacturer and a distributor as well as horizontal price-fixing agreements
between two or more manufacturers or between two or more distributors. See Tex. Att’y Gen. Op.
No. JC-0296 (2000) at 3-6; see also id. at 5 (“section 2001.556 appears to have a different purpose
than antitrust law . . . . [I]t appears that this provision is concerned less with free enterprise and
competitive pricing than with strict regulation of manufacturers and distributors of bingo equipment
and their relationships with persons who conduct bingo.“). We also concluded that section 2001.556
does not distinguish between bingo-equipment sales and leases, relying particularly upon the broad
language of subsection (b):
[Slubsection (b) of [section 2001.5561 states more broadly that “[t]he
price ofbingo supplies and equipment in the competitive marketplace
shall be established by the manufacturer, distributor, or supplier and
may not be established in concert with another manufacturer,
distributor, or supplier.” TEX. Oct. CODE ANN. 5 2001.556(b)
(Vernon 2000). Based on the broad language of subsection (b),
which is not limited to sales, we conclude that the section 2001.556
prohibition on price fixing applies to pricing of bingo equipment
generally, and applies to the pricing of leases as well as sales.
Id. at 6. Your request letter indicates that you disagree with our construction of section 2001.556,
as do two briefs we received on this matter2 However, neither the request letter nor the briefs raise
authorities we did not consider in our earlier opinion nor do they point to any subsequent
developments in the law. Thus, rather than extensively reanalyze the statute or our prior opinion
here, we simply apply section 2001.556 as we construed it in Attorney General Opinion JC-0296.
*See Brief from Brian J. O’Toole, Kasling, O’Toole & Hemphill, L.L.P., to Honorable John Comyn, Texas
Attorney General (Oct. 12, 2001) (on behalf of Trend Gaming Systems, L.L.C., and GameTech International); Brief
from Jane Thompson, Thompson Allstate Bingo Supply, Inc., to Susan D. Gusky, Chair, Opinion Committee, Office
of Texas Attorney General (Oct. 8,200l) (on file with Opinion Committee).
The Honorable Eddie Lucia, Jr. - Page 3 (JC-0450)
You ask about the legality under section 2001.556 of a “revenue-share leasing agreement”
between a manufacturer and a distributor, which you describe as follows:
Several manufacturers of bingo cardminding equipment
operate through “revenue share” leasing arrangements with their
distributors. Under a typical revenue share arrangement, a
manufacturer leases equipment to the distributor in exchange for a
percentage of the revenues that the distributor earns by subleasing the
equipment. The distributor leases the equipment to conducting
organizations at a particular bingo hall, in exchange for a portion of
the revenues that the conductors receive from their bingo customers.
The conductor retains the ability to set the prices to the end customer,
which results in fluctuation of the conductor’s lease payment to the
distributor, and in turn the distributor’s lease payment to the
manufacturer. This arrangement reduces the financial risk to the
charity in a lease with the distributor.
Obviously, the amount of money the manufacturer receives is
dependent on the amount of money the distributor receives from the
conductors. Therefore, it is common in the industry for the
manufacturer to have the right to approve the terms of the
distributor’s contract with the conductors. If the distributor proposed
to lease the equipment to conductors at, for example, 5% of the
conductors’ revenue, the transaction likely would not make economic
sense to the manufacturer and the manufacturer could refuse to lease
equipment at that rate to its distributor.
Request Letter, supra note 1, at 1 (emphasis added). Although you have not expressly stated
whether these agreements control the price at which the distributor leases equipment to bingo-game
conductors, we assume this to be the case, based on your statement that the manufacturer has “the
right to approve the terms of the distributor’s contract with the conductors.” Id.; see also id. at 3-4
(“[T]he revenue share lease necessarily requires some sort of agreement or approval from the
manufacturer regarding the distributor’s contract with the conductor.“). As we understand it, under
a revenue-share leasing agreement, the bingo-game conductor leases equipment from a distributor
for a percentage of the conductor’s revenue rather than a fixed monetary price. This percentage
share is in fact the price the distributor charges the conductor for the use of the equipment. An
agreement that allows a manufacturer to dictate the percentage of revenue the distributor will take
from the conductor, controls the price the conductor pays the distributor. If these agreements do
indeed control the price at which the distributor leases equipment to bingo-game conductors, then
they involve price fixing between a manufacturer and distributor and are prohibited by section
2001.556.
The Honorable Eddie Lucia, Jr. - Page 4 (JC-0450)
You suggest that even if section 2001.556 applies to leases in general, it does not apply to
revenue-share leases, citing section 2001.405 of the Occupations Code. That statute provides as
follows:
Bingo may not be conducted at a leased premises if rental
under the lease is to be paid, in whole or part, on the basis of a
percentage of the receipts or net proceeds derived from the operation
of the game or by reference to the number of people attending a
game.
TEX. OCC. CODEANN. 8 2001.405 (Vernon 2002). You argue that it is significant that “[tlhere is no
similar prohibition against setting an equipment lease payment based on the amount of revenue
derived from the use of the equipment,” because “[hlad the Legislature or the Lottery Commission
sought to prevent percentage leases for cardminding equipment, certainly they could have done so.”
Request Letter, supra note 1, at 3. We disagree. The legislature’s express prohibition of certain
kinds of rental arrangements in section 2001.401, which essentially precludes the landlord of a game
from having an economic stake in the game, has no bearing on what is and is not permissible in
contractual relationships between bingo-equipment manufacturers and distributors under section
2001.556. Moreover, we do not necessarily conclude that section 2001.556 prohibits all revenue-
share leasing agreements, which would involve consideration of provisions beyond the scope of your
request. See, e.g., TEX. OCC.CODEANN. § 200 1.407 (Vernon 2002) (generally governing equipment
and supply transactions). Rather, we conclude that section 2001.556 prohibits revenue-share leasing
agreements in which the manufacturer and the distributor agree on the price that the distributor will
charge the conductor.
In sum, if under a revenue-share leasing agreement the manufacturer controls the price that
the distributor charges to bingo-game conductors for leasing equipment, the agreement violates
section 2001.556. As this office does not review or construe specific contracts,3 we answer your
question generally and do not express any opinion with respect to any particular contract.
3See, e.g., Tex. Att’y Gen. Op. Nos. JC-0032 (1999) at 4 (contract interpretation beyond purview ofthis office);
DM-383 (1996) at 2 (interpretation of contract not appropriate function for opinion process); DM-192 (1992) at 10
(“This office, in the exercise of its authority to issue legal opinions, does not construe contracts.“); JM-697 (1987) at
6 (“review of contracts is not an appropriate function for the opinion process”).
The Honorable Eddie Lucia, Jr. - Page 5 (JC-0450)
SUMMARY
A revenue-share leasing agreement violates section 2001.556
of the Occupations Code, which precludes a bingo-equipment
manufacturer, distributor, or supplier from agreeing to fix the price of
bingo equipment, if under the agreement the manufacturer controls
the price that the distributor charges to bingo-game conductors for
leasing equipment.
Attorney General of Texas
HOWARD G. BALDWIN, JR.
First Assistant Attorney General
NANCY FULLER
Deputy Attorney General - General Counsel
SUSAN DENMON GUSKY
Chair, Opinion Committee
Mary R. Crouter
Assistant Attorney General, Opinion Committee